Testimony 

Before the Committee on Small Business 

and Entrepreneurship, U.S. Senate 

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 9:30 a.m. EDT 

Thursday, May 1, 2003 SMALL BUSINESS 

ADMINISTRATION 

Observations on the 

Disaster Loan Program 

Statement of Davi M. D’Agostino 

Director, Financial Markets and Community Investment 

GAO-03-721T 
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Page 1 GAO-03-721T 

Madam Chair and Members of the Committee: 

I am pleased to be with you today at this roundtable to discuss the role of 

the Small Business Administration’s (SBA) Disaster Loan Program in 

responding to the September 11, 2001, terrorist attacks, general 

performance measures for the program, and the effects of SBA’s program 

to sell loans to private investors on disaster loans and their borrowers. As 

you know, the effects of the September 11 attacks were felt not only in 

New York but also around our country, with the economic damage 

occurring in states as far west as California. The unique nature of the 

attacks and the government’s response required SBA to make 

unprecedented efforts to expand its disaster lending coverage and to be 

flexible in its efforts to serve those needing assistance. Notwithstanding 

SBA’s extraordinary performance in responding to the September 11 

attacks, our work showed that the Disaster Loan Program’s performance 

measures do not fully or adequately reflect SBA’s actual performance. In 

reviewing SBA’s loan sales program, which includes disaster loans, we 

identified three areas needing improvement: tracking borrower inquiries 

and complaints; sales budgeting and accounting, which affect the 

reliability of SBA financial statements and budget information; and 

reporting on the operational benefits of the loan sales. 

My remarks today will focus on SBA’s (1) response to the September 11 

terrorist attacks; (2) performance plans and measures for its Disaster Loan 

Program; and (3) loan asset sales program, which involves selling disaster 

and other loans.1

 My comments are based on our recent reports on SBA’s 

Disaster Loan Program (Small Business Administration: Response to 

September 11 Victims and Performance Measure for Disaster Lending, 

GAO-03-385, Jan. 29, 2003) and loan asset sales program (Small Business 

Administration: Accounting Anomalies and Limited Operational Data

 1

For information on assistance provided to small businesses in the Lower Manhattan area 

after September 11 by SBA and other government agencies, please see U.S. General 

Accounting Office, September 11: Small Business Assistance Provided in Lower 

Manhattan in Response to the Terrorist Attacks, GAO-03-88 (Washington, D.C.: Nov. 1, 

2002). 
Page 2 GAO-03-721T 

Make Results of Loan Sales Uncertain, GAO-03-87, Jan. 3, 2003).2 Both are 

available on our Web site: www.gao.gov. 

The nature of the September 11 attacks and subsequent government 

actions presented SBA’s Disaster Loan Program with new and difficult 

challenges. Specifically, small businesses in both the declared disaster 

areas and around the nation suffered economic injury. SBA sought to 

respond to the concerns of small businesses in the months following 

September 11 by extending eligibility for economic injury loans 

nationwide—a marked change from earlier disasters that affected 

primarily businesses in one geographic location. In addition, SBA modified 

both the terms and lending practices of its Disaster Loan Program—for 

example, by reducing the amount of documentation some borrowers 

needed to provide. Congress supported these efforts with supplemental 

appropriations that allowed SBA to offer larger loans to a relatively broad 

population of victims. By the end of fiscal year 2002, the agency had 

worked with individuals and businesses in all 50 states, the District of 

Columbia, and the U.S. territories, approving 9,700 loans totaling 

$966 million. 

We found that SBA had adapted its Disaster Loan Program to respond to 

the needs of September 11 victims but that SBA’s performance measures 

did not provide congressional decision makers with an accurate 

description of the program’s performance. For example, two of SBA’s six 

performance measures assessed only one discrete step in the loan 

application and disbursement processes—the application process. In 

addition, some output measures3

 had not kept up with SBA’s actual 

progress in assisting disaster victims. Further, we identified features in 

SBA’s description of its Disaster Loan Program in the 2002 and 2003 

performance plans that made assessing the agency’s progress in attaining 

 2

Also see April 29, 2003, testimony before the Subcommittee on Government Efficiency and 

Financial Management, Committee on Government Reform, U.S. House of Representatives. 

U.S. General Accounting Office, Small Business Administration: Loan Accounting and 

Other Financial Management Issues Impair Accountability, GAO-03-676T (Washington, 

D.C.: Apr. 29, 2003). 

3

According to Office of Management and Budget (OMB) guidance, outputs are the level of 

activity that can be produced or provided over a given period of time or by a specific date. 

Outcomes are the intended results, effects, or consequences that occur from carrying out 

program activities. OMB, Preparation and Submission of Strategic Plans, Annual 

Performance Plans, and Program Performance Reports, Circular No. A-11, Part 6. 

(Washington, D.C: June 2002). 

Summary 
Page 3 GAO-03-721T 

its strategic goals difficult. For example, although SBA guidance 

recommended that program goals be outcome oriented, SBA’s 2003 

performance goal was output oriented. 

Our review of SBA’s five loan sales from August 1999 to January 2002 

revealed that 85 percent of the $4.4 billion in loans sold were disaster 

assistance home and business loans. SBA established some policies to 

protect borrowers whose loans were sold. For example, disaster loans less 

than 2 years old were not sold because they typically required more 

servicing and sometimes had to be increased to cover exigencies, such as 

revised physical damage estimates. In trying to determine how borrowers 

reacted to having their loans sold, we found that SBA relied on borrower 

inquiries and complaints to determine whether purchasers of the loans 

were using prudent loan servicing practices. However, information on 

borrowers’ reactions was incomplete because SBA did not have a 

comprehensive process to capture the inquiries and complaints it receives. 

Moreover, we found serious issues in SBA’s budgeting and accounting for 

the loans sold, as well as the remainder of the portfolio. For example, SBA 

incorrectly calculated the accounting losses on the loan sales and lacked 

reliable financial data to determine the overall financial impact of the 

sales. In addition, there were significant unexplained declines in the 

subsidy allowance for the disaster program. We discussed these issues 

with SBA’s auditor who subsequently withdrew its “clean” financial 

statement audit opinions for fiscal years 2000 and 2001 and disclaimed an 

opinion for 2002. SBA is continuing to work on resolving its accounting 

and financial reporting problems. Finally, our analysis of the operational 

benefits from loan sales suggested that some benefits that SBA reported, 

such as reductions in servicing and workload volume, either had not yet 

materialized or were overstated. 

When disasters such as floods, tornadoes, or earthquakes strike, federal, 

state, and local government agencies coordinate to provide assistance to 

disaster victims. SBA, through its Disaster Loan Program, is part of this 

effort. SBA provides loans to households and businesses without credit 

available elsewhere at a maximum rate of 4 percent and up to a 30-year 

term. For households or businesses with credit available elsewhere, SBA 

provides loans at a maximum rate of 8 percent and, for businesses, up to a 

3-year term. Business loans are available up to $1.5 million,4

 loans for 

 4

Even if a business receives a loan to cover both physical damage and economic injury, the 

total loan amount generally cannot exceed $1.5 million. 

Background 
Page 4 GAO-03-721T 

physical damage to homes are available up to $200,000, and loans for the 

repair or replacement of personal property are available up to $40,000. 

Like other federal programs, SBA’s Disaster Loan Program follows 

performance measurement guidelines under the Government Performance 

and Results Act (GPRA) of 1993.5

 GPRA requires agencies to set multiyear 

strategic goals in their strategic plans and corresponding annual goals in 

their performance plans, measure performance toward the achievement of 

those goals, and report on their progress in their annual performance 

reports.6

 Annual performance plans are sent to Congress soon after the 

transmittal of the President’s budget and provide a direct linkage between 

an agency’s long-term goals and mission and day-to-day activities. Related 

annual performance reports describe the degree to which performance 

goals have been met. Guidance from the Office of Management and Budget 

(OMB) indicates that performance plans should include measures of 

outcomes—intended results—when the outcomes can be achieved during 

the fiscal year covered by the plan. Otherwise, the guidance recognizes 

that the performance plans will predominantly include measures of 

outputs (program activities) rather than outcomes. 

In 1999, SBA began a loan asset sales program, at the direction of OMB, to 

reduce the amount of debt the agency owned and serviced. OMB is 

interested in increasing loan asset sales in order to improve the 

management of loan assets and to transfer loan servicing responsibilities 

to the private sector. Our review focused on SBA’s first five loan sales 

through January 2002 in which 110,000 loans with an outstanding balance 

of $4.4 billion were sold. Approximately 85 percent of the dollar volume of 

loans SBA sold were disaster assistance loans made directly by SBA, most 

of which have below-market borrower interest rates. The remaining 15 

percent were mostly defaulted 7(a) loans, made by SBA’s lending partners 

(primarily banks). 

 5

P.L. 103-62, GPRA 1993. 

6

OMB provides guidance on developing these plans in “Preparation and Submission of 

Strategic Plans, Annual Performance Plans, and Annual Program Performance Reports,” 

Circular No. A-11, Part 6 (Washington, D.C: June 2002). 
Page 5 GAO-03-721T 

In the weeks and months following the terrorist attacks, SBA and 

Congress faced the challenge of responding to the lingering effects of the 

attacks and subsequent federal actions on small businesses throughout the 

country. SBA responded first in Lower Manhattan, then expanded its 

response as additional parts of the New York City and Pentagon areas 

were designated disaster areas. Ultimately, SBA helped small businesses 

around the country with disaster lending. In response to the concerns 

expressed by small businesses, SBA and Congress modified the program, 

expanding eligibility for economic injury loans to small businesses around 

the country, providing translators for applicants, modifying the size 

standards for small businesses, expediting the loan approval and 

disbursement processes, and providing larger loans. 

SBA’s response to the terrorist attacks began on September 11, when SBA 

officials arrived in Lower Manhattan to begin coordinating the agency’s 

efforts. The initial disaster area in New York City and New Jersey 

eventually expanded to include additional counties in Connecticut, 

Massachusetts, New Jersey, New York, and Pennsylvania. Maryland, 

Virginia, and parts of the District of Columbia were also declared disaster 

areas for SBA purposes. As the United States began to deploy military 

personnel in response to the terrorist attacks, small businesses nationwide 

affected by the loss of employees called up as military reservists were 

eligible to apply for a disaster loan under the Military Reservist Economic 

Injury Disaster Loan (EIDL) program.7

 Small businesses across the nation 

that were adversely affected by the lingering effects of the attacks and 

subsequent government action, such as airport closings and the 

precipitous drop in tourism, were also eligible to receive disaster loans 

under SBA’s Expanded EIDL program. In essence, the entire country was 

deemed a disaster area. 

More than half the loans went to small businesses outside the area of the 

attack sites in New York City and at the Pentagon, with businesses in 

Florida and California receiving the second and third largest share of loans 

(see fig. 1). Loans ranged from $300 to $1.5 million, with $50,000 as the 

most frequently disbursed amount (11 percent of all loans). Businesses 

outside the immediate sites of the attacks generally received slightly more 

than those close by, in part because they did not have access to the 

 7

The Military Reservist EIDL program is available to small businesses whenever the 

government calls military reservists to duty, not just during federally declared disasters. 

SBA Expanded and 

Changed the Terms of 

Its Disaster Loan 

Program in Response 

to the September 11 

Attacks 

SBA’s Response Covered 

Small Businesses 

Nationwide 
Page 6 GAO-03-721T 

resources available in New York City. The loans were spread among 

industries, with no single type of business accounting for most of the 

funds (see fig. 2). The manufacturing sector received the most funds, 

followed by professional, scientific, and technical services; transportation 

and warehousing; wholesale trade; and accommodation and food services. 

Figure 1: Geographic Distribution of SBA September 11 Loan Disbursements 

Source: GAO analysis of SBA data.

$100 to $400

$50 to $100

$20 to $50

$10 to $20

Less than $10

11%

Fla.

4%

N.J.

3%

Va.

3%

Tex.

45%

N.Y.

6%

Cal.

Dollars in millions
Page 7 GAO-03-721T 

Figure 2: SBA September 11 Business Loan Disbursements, By Industry 

In the months after the terrorist attacks, small business owners affected by 

the terrorist attacks presented a number of concerns to Congress about 

SBA’s Disaster Loan Program. SBA officials regarded these comments as 

valuable feedback and worked with Congress to make several 

modifications to the program for September 11 victims: 

• First, in October 2001, SBA issued regulations to make economic injury 

disaster loans available to small businesses nationwide, an 

unprecedented change to the Disaster Loan Program, according to SBA 

officials. SBA’s Expanded EIDL program enabled businesses outside 

the declared disaster areas to apply for loans to cover “ordinary and 

necessary” operating expenses that could not be met because of the 

attacks or related actions of the federal government between 

September 11 and October 22, 2001. 

• Second, SBA printed informational packets in languages such as 

Spanish and Chinese; provided multilingual staff at its offices who 

could speak Mandarin Chinese, Croatian, Arabic, and Spanish; and was 

prepared to send employees with additional language capabilities to 

New York City. 

SBA and Congress 

Modified the Disaster Loan 

Program in Response to 

Complaints from Small 

Businesses 
Page 8 GAO-03-721T 

• Third, in February 2002, SBA modified the size standards for all 

September 11 loan applicants, allowing borrowers to take advantage of 

recent inflation-based adjustments.8

 In addition, in March 2002, SBA 

increased the size threshold for travel agencies adversely affected by 

the attacks from $1 million in annual revenues to $3 million. 

• Fourth, to expedite loan processing, loan officers streamlined their 

needs analysis, calculating economic injury loans using the applicant’s 

annual sales and gross margin. By the end of fiscal year 2002, SBA was 

processing September 11 business loans, on average, in 13 days 

compared with 16 days for disaster assistance business loans 

processed in fiscal year 2001. To further expedite disbursement to 

those in the World Trade Center and Pentagon disaster areas, SBA 

decreased the amount of documentation needed to disburse up to 

$50,000. 

• Fifth, in January 2002, Congress approved supplemental appropriations 

for SBA of $150 million, raised the maximum loan amount from $1.5 

million to $10 million, and deferred payments and interest for 2 years.9

Congress also created the Supplemental Terrorist Activity Relief 

(STAR) program to provide assistance to small businesses affected by 

the terrorist attacks through SBA’s 7(a) loan guaranty program, which 

is not part of the Disaster Loan Program. Under the STAR program, 

SBA reduced the fee charged to lenders on new 7(a) loans from 0.50 

percent of the outstanding balance of the guaranteed portion of the 

loan to 0.25 percent. As of the end of fiscal year 2002, SBA had 

guaranteed about 4,700 STAR loans for $1.8 billion. 

Some small businesses affected by the terrorist attacks maintained that 

SBA’s underwriting criteria—for example, collateral requirements—were 

too restrictive. They testified that SBA had withdrawn their applications 

because they would not use their homes as collateral. They argued that it 

was too risky to use their homes as collateral, especially since the survival 

of their businesses was uncertain. SBA, however, did not change its 

underwriting criteria for September 11 victims. SBA officials said that the 

 8

In January 2002, SBA increased the revenue-based thresholds for determining the size of 

businesses by the rate of inflation. In February 2002, SBA retroactively applied the 

inflation-adjusted size standards to all businesses applying for September 11 loans, 

allowing more businesses to seek assistance. 

9

Emergency Supplemental Appropriations for Recovery and Response to Terrorist 

Attacks on the United States Act, 2002 P.L. 107-117 (Emergency Supplemental Act of 2002). 
Page 9 GAO-03-721T 

agency makes every effort to approve each application by applying more 

lenient credit standards than private lenders. However, the officials said 

that they adhered to their credit standards to minimize losses and program 

costs. 

SBA data indicate that the 52 percent rate for withdrawing and declining 

September 11-related loan applications was not out of line when compared 

with other disasters or with private lenders. The primary reasons SBA 

identified for withdrawing September 11 loan applications was a lack of 

Internal Revenue Service (IRS) records to corroborate applicants’ income, 

and applicants’ failure to provide additional information SBA had 

requested. SBA officials said that the most common reasons for declining 

September 11 loan applications were inability to repay the loan and 

unsatisfactory credit. According to SBA, these were also the primary 

reasons for withdrawing or declining nearly two-thirds of all SBA disaster 

loan applications in fiscal year 2001. 

SBA officials believed that many of the complaints about the disaster 

program resulted from the mismatch between victims’ expectations of 

SBA’s disaster program and the nature of the program. SBA officials told 

us that they tried to minimize public confusion about the nature of the 

assistance available from SBA by working closely with the media and 

public officials to provide accurate information about the Disaster Loan 

Program. 

The six performance indicators SBA currently uses to measure the 

Disaster Loan Program are 

• field presence within 3 days of a declaration,10

• loans processed within 21 days, 

• customer satisfaction rate, 

• homes restored to predisaster condition, 

 10Federal assistance, including all types of SBA disaster loans, is available once the 

President declares that a major disaster or emergency situation exists. Governors may 

request a disaster declaration from SBA if damage is minor or moderate and a declaration 

from the Department of Agriculture if losses are confined to agricultural production. SBA 

offers only economic injury loans in these last two situations. 

SBA’s Disaster 

Program Performance 

Measures Do Not 

Capture the Scope of 

the Agency’s Efforts 
Page 10 GAO-03-721T 

• businesses restored to predisaster condition, and 

• initial loan disbursement within 5 days of receiving closing documents. 

We identified several problems with these measures. For example, several 

are output measures that did not reflect the actual progress being made. 

Some are proxies that did not accurately represent what was being 

measured. There is a lack of measures for intermediate or end outcomes, 

and features in SBA’s description of the Disaster Loan Program in its 

performance plans made assessing the program difficult. Several of the 

limitations we found had been identified in previous GAO or SBA 

Inspector General reports and had not been corrected.11

Officials from SBA’s Disaster Area Offices (DAO) questioned whether the 

three output measures—establishing a field presence within 3 days of a 

disaster declaration, processing loan applications within 21 days, and 

disbursing initial loan amounts within 5 days of receiving the closing 

documents—were appropriate indicators of timely service to disaster 

victims since they did not, for example, capture recent program 

improvements. SBA has had a 98 percent success rate in meeting the 

target for establishing a field presence each fiscal year since 1998. Officials 

from the area offices said that improvements in planning, interagency 

coordination, and technology enabled them to have staff on site within 1 

day of a disaster declaration. According to DAO staff, delays in 

establishing a field presence generally occurred because SBA was waiting 

for decisions from state officials. 

SBA data and comments from DAO officials suggested that the second 

output measure—processing loan applications within 21 days of receipt—

did not reflect improvements in past performance. For example, SBA 

aimed for an 80 percent success rate for fiscal year 2001, but the actual 

time required for processing averaged 13 days in fiscal year 2001 and fell 

to 12 days in fiscal year 2002. The average time required to process the 

 11See U.S. General Accounting Office, Managing for Results: Opportunities for Continued 

Improvement in Agencies Performance Plans, GAO/GGD-99-215 (Washington, D.C.: July 

20, 1999); Small Business Administration: Status of Achieving Key Outcomes and 

Addressing Major Management Challenges, GAO-01-792 (Washington, D.C.: June 22, 2001); 

and Final Audit Report—Results Act Performance Measurement for the Disaster 

Assistance Program, Small Business Administration, Office of the Inspector General, Audit 

Report 1-06 (Feb. 15, 2001). 

Three Output Measures Do 

Not Capture Progress 
Page 11 GAO-03-721T 

September 11 business loans was also about 13 days. DAO officials 

attributed their faster processing times to several agencywide 

improvements. 

DAO staff also suggested that another measure—the 5-day target for 

making initial disbursements once closing documents are received—did 

not reflect past performance and was a low threshold. Before 2002, SBA 

had an internal goal of ordering disbursements within 3 days of receiving 

closing documents. When SBA included this measure in the performance 

plan, the disbursement target was increased to 5 days to accommodate 

weekends and holidays, because SBA’s system for tracking disaster loan 

processing could not distinguish between workdays and other days. 

Accustomed to the stricter 3-day standard, staff were able to meet the 5-

day standard with ease. 

In commenting on a draft of our report, SBA indicated that the output 

measures were established based on what was determined to be a 

reasonable level of service in an average year, taking into account the 

amount of resources required. Because disasters cannot be predicted, 

officials did not think it would be feasible to adjust production levels 

based on a single year’s performance. Even with some program 

improvements, they believed it would be very difficult and costly to 

maintain such levels during periods of multiple major disasters. Although 

SBA acknowledged that a basis for modifying some output measures might 

exist, the officials believed that the modifications should be based on an 

average level of projected activity that takes into consideration some 

permanent improvements that have been made to the program. 

SBA officials indicated that three measures—number of homes restored to 

predisaster condition, number of businesses restored to predisaster 

condition, and customer satisfaction—were used to assess the effect, or 

outcomes of lending to disaster victims. But these “outcome” measures 

also had limitations. First, while the restoration of homes and businesses 

was a stated outcome in SBA’s strategic and performance plans, SBA did 

not actually measure the number of homes and businesses restored. 

Instead, SBA reported on the number of home loans approved as a proxy 

measure for the number of homes restored to predisaster condition. 

However, these measures assessed what are actually program outputs 

(loans approved) rather than stated outcomes (homes and businesses 

restored). Such proxy measures, then, were likely to have overestimated 

the number of homes and businesses restored because borrowers might 

cancel the loan. According to SBA, about 10 percent of the loans approved 

Two “Outcome” Measures 

Actually Assessed Outputs 
Page 12 GAO-03-721T 

for September 11 victims were cancelled by borrowers. Third, these 

indicators used annual figures that were affected by factors outside of 

SBA’s control, such as the number of disasters that occurred during a 

given fiscal year. A more useful indicator would be the percentage of 

homes and businesses receiving loans that were restored each year to predisaster conditions. 

To measure customer satisfaction, SBA used the results of its survey of 

successful loan applicants. (SBA also used this survey to evaluate the 

impact of the program.) But the survey methodology had significant 

limitations. For example, it measured the satisfaction of only a portion of 

the customers that the disaster loan program serves. Every DAO director 

we interviewed indicated that all disaster victims were SBA customers and 

that a broader population should be surveyed. In 2001, we and the SBA 

Inspector General made the same suggestion to SBA. As we indicated 

then, the survey method SBA had been using was likely to produce 

positively skewed responses. SBA headquarters officials indicated that 

they were resistant to surveying those who were denied loans because 

they presumed that the applicants’ responses would be negative. 

Recommendations from SBA’s Inspector General, and guidance from us 

and within SBA, have encouraged the use of outcome measures for this 

program. But we found that only one of the performance measures SBA 

was using—customer satisfaction—had the potential to assess a stated 

outcome of the Disaster Loan Program. The other intended outcomes, 

which could have been measured annually or biannually, such as jobs 

retained or housing restored, were not measured. 

In addition, SBA had stopped using intermediate outcome measures it had 

used in the past—loan currency and delinquency rates—to assess the 

quality of disaster loans. It also had not measured another potential 

intermediate outcome from the underwriting process—having appropriate 

insurance. As one DAO official suggested, having coverage such as flood 

insurance potentially reduces the number of loans required in some 

disaster-prone areas. As we have reported previously, such insurance can 

reduce disaster assistance costs and could reduce the effect of a disaster 

on its victims.12

 12U.S. General Accounting Office, Disaster Assistance: Information on Federal Costs and 

Approaches for Reducing Them, GAO/T-RECD-98-139 (Washington, D.C.: Mar. 26, 1998). 

Some Measures Did Not 

Assess Intermediate or 

End Outcomes 
Page 13 GAO-03-721T 

SBA headquarters staff said that while they recognized some of these 

shortcomings, they had limited ability to develop and use better outcome 

measures. The staff indicated that the very nature of disaster lending was 

unpredictable, making it difficult to set performance targets for 

intermediate or end outcomes. One SBA official said that the agency is 

reluctant to measure and report intermediate or end outcomes that are 

outside its control. Other DAO officials indicated that conducting some 

end outcome measurement methodologies would be expensive—for 

instance, on-site inspections of a sample of homes and businesses to 

assess restoration. 

We made two recommendations designed to help SBA improve its 

performance measures for disaster lending. First, we recommended that 

SBA revise the performance measures to include more outcome measures; 

assess more significant outputs, such as service to applicants or loan 

underwriting; report achievements that can be compared over several 

years, such as percentages; and include performance targets that 

encourage process improvement rather than maintaining past levels of 

performance. Second, we recommended that SBA revise and expand its 

current research to improve its measures and evaluate program impact. To 

improve its current measures, we suggested that SBA conduct research, 

such as surveying DAO staff and reviewing relevant literature to identify 

new outcome measures that could be tested. To evaluate its program 

impact, SBA needs to ensure that its survey covers all disaster loan 

applicants and to employ other methods, such as periodic analyses of 

regional statistics, to assess the economic impact of the program on local 

communities. SBA generally agreed with our recommendations and said it 

is addressing our concerns. As of this month, SBA had distributed a 

customer service survey to help evaluate the Disaster Loan Program’s 

impact and was developing a broader survey. We will follow up with SBA 

regarding the status of their efforts. 

We identified several features of the description of the Disaster Loan 

Program in the 2002 and 2003 performance plans that make it difficult to 

assess whether SBA is making progress in attaining its strategic goal. First, 

between 2002 and 2003, the program’s performance goal changed from an 

outcome-oriented goal (helping families recover from disasters) to an 

output-oriented goal (streamlining disaster lending) without the required 

explanation. GPRA requires agencies to explain why they change 

performance goals, and OMB generally recommends that agencies use 

goals that are outcome-oriented. 

SBA’s Performance Plans 

Had Limitations 
Page 14 GAO-03-721T 

Second, the 2002 and 2003 performance plans do not define the linkages 

between each program output and each intermediate or end outcome. The 

plans do not explain how the outputs (disaster loans) are related to the 

performance indicators (field presence, customer satisfaction, and 

application processing time frames). Third, the plans do not explain how 

the performance measures or indicators are related to either program 

outcomes or outputs. Fourth, performance indicators are added to or 

dropped from the plans without explanation, making it difficult to 

understand how and if SBA expects to improve or sustain its loan 

processing performance. 

The performance plans also contain incomplete or inaccurate information 

on some performance indicators. For example, despite OMB and SBA 

guidance, validation and verification information on field presence and 

loan processing measures is omitted, making it difficult to assess the 

quality of performance data. In addition, the 2003 performance plan 

indicates that data on the number of homes restored to predisaster 

condition are based on on-site inspections of homes. However, SBA 

officials indicated that they use a proxy measure—the number of original 

home loans approved—as the actual source of data for homes restored to 

predisaster condition. 

We recommended revising the section of the performance plan that covers 

the Disaster Loan Program to establish direct linkages between each 

output and outcome and the associated performance measure; accurately 

describe proxy measures as either outcome or output measures; 

accurately describe the validation and verification of performance 

measures; and explain additions, deletions, or changes from the previous 

year’s goals and measures. SBA also agreed with this recommendation. 

SBA informed us this month that it has undertaken a long-term review of 

the strategic plan with the aim of revising the performance goals and 

measures and linking performance to the new plans and goals. We will 

monitor SBA’s progress in implementing this initiative. 

A large portion—85 percent in the first 5 sales—of the loans sold are 

disaster loans previously serviced by SBA. SBA’s program to sell disaster 

loans that it makes directly to borrowers and subsequently services results 

in private investors owning and servicing the loans over their remaining 

terms. It was difficult for us to determine the reaction of borrowers whose 

loans were sold because of incomplete records at SBA. We identified 

numerous errors in SBA’s accounting for the loan sales, including 

unexplained declines in SBA’s loss allowance account for disaster loans. 

Loan Assets Sales 

Affect Disaster Loan 

Borrowers and the 

Loan Program 
Page 15 GAO-03-721T 

Until corrected, these errors mean that SBA’s subsidy estimates and 

reestimates for the disaster loan program cannot be relied upon. The 

operational benefits from selling loans that SBA has claimed may be 

overstated. 

SBA built in some safeguards to protect borrowers when their loans are 

sold. But, because SBA’s process for documenting and tracking borrower 

inquiries and complaints has weaknesses, we could not determine how 

many borrowers had actually contacted SBA with complaints or concerns 

about the loan sales. 

Borrowers have little control over what happens to their loans if SBA 

decides to sell them. However, SBA has some policies intended to protect 

the integrity of the programs that provided the loans. SBA’s programs, 

including servicing disaster loans after they are made, are designed to help 

the borrower recover from a disaster. To protect this public policy goal, 

SBA’s loan sales agreements with purchasers require certification that the 

investors are qualified to purchase and service the loans and will follow 

prudent loan servicing practices. The loan sales agreement also prevents 

purchasers from unilaterally changing the terms and conditions of the 

loans. In addition, SBA does not sell some disaster loans, including those 

issued to borrowers currently residing in a federally declared disaster area 

and those that are less than 2 years old. According to SBA, more servicing 

is typically required in the first 2 years of a disaster loan—such as changes 

due to revised physical damage estimates. 

Nevertheless, we were not able to validate the way in which borrowers 

reacted to the loan sales because SBA could not provide a reliable 

estimate or information on the number of borrowers who had contacted 

them about their sold loans. Complete and reliable information on 

borrower complaints is important because SBA officials told us that when 

a borrower complained about a servicing action they contacted purchasers 

to collect additional information and determine whether a purchaser was 

breaching the borrower protections. One reason why SBA’s tracking 

system is ineffective is that borrowers with questions or complaints can 

call or write to several different SBA offices, or to a representative of 

Congress. Some SBA field office officials told us that SBA does not 

provide them with clear guidance on how to respond to or document such 

complaints. Officials from seven district offices, three servicing centers, 

and two disaster area offices told us that they had received calls and 

letters from borrowers who had concerns about loans that had been sold. 

But the methods for documenting inquiries and complaints varied across 

Information on How 

Selling Disaster Loans 

Affects Borrowers Is 

Incomplete 
Page 16 GAO-03-721T 

offices, except for congressional letters, which were consistently 

forwarded to SBA headquarters. In August 2001, SBA began providing a 

toll-free number for borrowers to call with questions or complaints about 

loan sales. Borrowers were informed about the toll-free number in a letter 

telling them how to contact the new owner of their loan. However, field 

office staff did not receive any guidance regarding the purpose and use of 

the toll-free number. 

Though we were unable to determine how many borrowers have 

contacted SBA about their sold loans, we reviewed 133 of the 155 written 

inquiries and complaints documented at headquarters, along with SBA’s 

written responses, to identify the types of questions and problems 

borrowers may have when their loans are sold. Our analysis showed that 

almost half (65) were inquiries and concerns about their loans being sold, 

requests to buy their own loans, or pleas not to have their loans sold. 

However, 47 of the borrowers complained about a purchaser’s servicing 

action. For example, some letters involved disagreements or frustration 

with servicing decisions, such as refusing to subordinate or release 

collateral,13 or imposing a fee to complete a servicing action such as 

subordination. Another 18 letters were from borrowers who wanted to 

defer payments or change the amount of their monthly payments because 

of financial problems, and felt they were not getting appropriate treatment 

from the purchasers of their loans. 

To address these weaknesses in the loan sales program, we recommended 

that SBA develop procedures for documenting and processing inquiries 

and complaints from borrowers, and then provide guidance to the field 

offices about implementing them. SBA reported to Congress in March 2003 

that it would soon issue a procedural notice to its field offices providing a 

uniform process for handling borrower inquiries and complaints. SBA 

stated that it also intends to establish an e-mail account for use by all 

employees to record and forward borrower comments to the asset sales 

team at headquarters, establish a database to track borrower comments, 

and enhance a tracking system used for residential borrower inquiries at a 

servicing center. We will follow up with SBA to monitor its 

implementation of our recommendations. 

 13“Subordination” occurs when a lender allows a new or existing loan to take a superior lien 

to another loan. For example, a borrower with an SBA disaster home loan may want SBA 

or a lender to subordinate the disaster loan to a new or refinanced home mortgage. 
Page 17 GAO-03-721T 

During our review, we found errors that we believe could have 

significantly affected the reported results in the budget and financial 

statements for fiscal years 2000 and 2001. Because of errors we identified, 

SBA’s auditor withdrew its clean audit opinions for those years and issued 

disclaimers of opinion. Moreover, because of these and other financial 

management issues, the auditor has disclaimed an opinion on SBA’s 

financial statements for 2002. Although this roundtable is not intended to 

explore the intricacies of accounting, I will briefly comment on our 

findings, which are fully discussed in the report and testimony cited 

previously.14

SBA incorrectly calculated the accounting losses on the loan sales and 

lacked reliable financial data to determine the overall financial impact of 

the sales. Further, because SBA did not analyze the effect of loan sales on 

its remaining portfolio, its reestimates of loan program costs for the 

budget and financial statements cannot be relied upon. In addition, SBA 

could not explain significant declines in its loss allowance account for 

disaster loans. Until SBA corrects these errors and determines the cause of 

the precipitous decline in the loss allowance account, the subsidy 

estimates and reestimates for the disaster loan program cannot be relied 

on. These errors and the lack of key analyses also mean that congressional 

decision makers are not receiving accurate financial data to make 

informed decisions about SBA’s budget and the level of appropriations the 

agency should receive. 

We recommended that, before doing more loan asset sales, SBA correct 

the accounting and budgeting errors and misstatements. And that SBA’s 

Inspector General, with SBA’s independent auditors, should assess the 

impact of the identified errors and determine if the prior audit opinions 

need to be revised. SBA is working to respond to these recommendations 

and, as we noted above, the auditor has withdrawn the previously issued 

clean audit opinions because they could not be relied upon. We will be 

monitoring SBA’s continuing efforts to resolve these issues. 

 14GAO-03-87 and GAO-03-676T. 

SBA’s Accounting for Loan 

Sales and the Remaining 

Portfolio Was Flawed 
Page 18 GAO-03-721T 

SBA reported that loan asset sales had benefited the agency’s operations 

by reducing loan servicing, and that this reduction in loan servicing 

volume should help allocate resources to other areas necessary to 

achieving SBA’s mission and help the agency to manage its loan portfolio 

more effectively. Though we found that loan servicing volume had 

declined for SBA disaster home loan centers, the effect on regular 

business loans was less clear. Furthermore, despite these reductions in 

loan servicing volumes, SBA had not yet redeployed staff to more missioncritical activities, such as lender oversight and business outreach. We 

found that loan sales have mostly reduced the servicing workloads for 

disaster assistance loans. They have had less impact on servicing 

workloads for 7(a) business loans, because lenders did not always consent 

to sell these loans. Because the reduction in loan servicing has involved 

disaster assistance loans, it was unclear to what extent loan sales would 

help the agency realign its workforce in the district offices that primarily 

serve small businesses. 

SBA has also reported that the loan sales have prompted borrowers to pay 

their loans in full, revealed inconsistencies in the application of the 

agency’s servicing procedures, and highlighted weaknesses in its 

information system. We found some support to show that the loan sales 

had produced portfolio management efficiencies. But we also found that 

some of the benefits SBA had reported began before the loan sales 

program, or could have been caused by other factors. For example, 

borrowers of disaster loans who refinanced their homes while lower 

interest rates were available often paid off their disaster loans, even 

though their disaster loans had low interest rates. 

To provide Congress and SBA with a better understanding of the impact of 

loan sales on SBA’s operations, we recommended that SBA conduct a 

more comprehensive evaluation of the loan sales’ impact on the agency 

and the cost savings from the sales. SBA recently stated that it will 

conduct such an evaluation.15 We will follow up with SBA as it addresses 

our recommendation. 

Madam Chair, Members of the Committee, this concludes my prepared 

statement. I would be happy to answer any questions at this time. 

 15Hector V. Barreto, Administrator, Small Business Administration, Letter to The Honorable 

Susan Collins, Chair, Committee on Government Affairs, U.S. House of Representatives, 

March 7, 2003. 

Loan Sales Have Reduced 

SBA’s Loan Servicing 

Volume, but Other 

Operational Benefits May 

Be Overstated 
Page 19 GAO-03-721T 

For information on this statement, please contact Davi D’Agostino, 

Director, Financial Markets and Community Investment, at (202) 512-8678 

or Katie Harris, Assistant Director, at (202) 512-8415. You may also reach 

them by e-mail at dagostinod@gao.gov or harrism@gao.gov. Other 

individuals who made key contributions to this testimony or related work 

include Dan Blair, Kristy Brown, Linda Calbom, Marcia Carlsen, Emily 

Chalmers, Patricia Donahue, Julia Duquette, David Eisenstadt, and Kay 

Kuhlman. 

Contacts and 

Acknowledgments 

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